Proves that marketing is what counts. Everything else is overhead! → Need an understanding of contribution and types of costs:
Contribution: Money directly produced by a sale. Profit includes weird accounting fictions like amortization and depreciation. Contribution looks at real money.
Price - COGS GMC
Regular $5.00 0.50 $4.50
Lower $4.00 0.30 $3.70
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The Marketing Control Statement
Revenue (Rev) - Variable Cost of Goods Sold (COGS) Gross Marketing Contribution (GMC) - Programmed Marketing Costs (PGMMC) Net Marketing Contribution (NMC)
Price - COGS GMC
If I lower price from $15 to $10, how many units will I sell?
Economics says I will sell more units if I lower price. But it cannot tell me exactly how many.
Revenue - All Expenses - Depreciation, Amortization, Interest - Taxes Net income
Focuses attention on cost-cutting, not proactive marketing because there is not an easy-to-follow path from changes in items to real dollars. Better to have a tool that can help make better managerial decisions, where results flow directly to the bottom line.
The Marketing Control Statement (MCS)
Wooden Binoculars $5000 Sale $2500
How many wooden binoculars will Pottery Barn sell at $25 ?
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Items that are relevant are Incremental and Avoidable.
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5
The Marketing Control Statement
Rev - COGS GMC - PGMMC NMC Same as income or price (per-unit) Direct variable costs only (no overhead) Total contribution provided by sale Avoidable marketing spending Cash flow after manufacture and marketing
Costs: Variable, Fixed, Programmed, Avoidable, Opportunity, Marginal
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6
Classifying Costs
Variable: Costs that change with specific activity. No activity, no variable cost. (raw materials; per-piece labor) Fixed: Fixed costs do not change with activity. They are constant over a period of time or normal range of operations. (property taxes) Programmed: Costs that arise from management decisions. Managers can create and take away. The relationship b/t what you spend and what you get is “iffy” (coupon) Other types of costs – Most can be classified as VC, FC, combo., or Programmed: Opportunity: The value of an opportunity passed up or foregone. (money you could be making cutting grass instead of being in class) Actually revenue. Marginal: The cost of producing one more unit. Includes only direct variable costs, not fixed, allocated, programmed, or sunk. (raw materials) Obviously variable. Incremental: Costs that change as a result of a decision or action. (new equipment) Avoidable: Costs that have not yet been spent, that can be avoided by managerial decision. (planned raises)
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Balancing Creative w/ Financial
Once you know what must happen to justify the change (e.g., increase sales by 6.67%) then you can balance the creative with the financial. Creative executions are no longer judged by “how funny” they are, or how many “eyeballs” they will attract, but by their impact on contribution. Learn to think in these terms and you will be able to talk with CEOs, CFOs, and line workers alike. The approach makes both business and common sense. Notice that changes in NMC will fall directly through the Income Statement to the bottom line (EBT).
MCS Example #2
A pharmaceutical manufacturer has developed a procedure to more inexpensively create the same compound that it currently uses in its bestselling drug. The drug currently sells for $5/pill with a $0.50 cost. The new procedure will allow the company to make the pill for $0.30. Can the company justify lowering the price to $4/pill?
Sunk: Costs that are irrevocable in a given situation. (finished goods inventory)
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MCS Example
Regular $15 5 $10 Sale $10 5 $ 5
We have an income statement, and everyone understands it. Why do we need another statement?
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E. J. Ourso College of Business
3
Traditional Income Statement
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E. J. Ourso College of Business
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MCS Example
Regular $15 5 $10 Sale $10 5 $ 5
Price - COGS GMC
If I lower price from $15 to $10, how many units will I sell?